Within Mercosur – the South American trade bloc including Argentina, Brazil, Paraguay, and Uruguay – Uruguay is seeking the greatest dynamism and market openness in its foreign relations. That is reflected in the pursuit, which now seems to be concrete, of a free trade agreement (FTA) with China.
Uruguay’s bilateral trade talks have opened tensions within Mercosur, however. The bloc should enter a period of strong political and commercial decisions, but at the same time it has few negotiations underway.
Ignacio Bartesaghi, Ph.D. in International Relations, is director of the International Business Institute of the Catholic University of Uruguay. An authoritative voice regarding Uruguay’s position in Mercosur and trade connections with Asia, he spoke to ReporteAsia to regarding the potential FTA between Uruguay and China, the internal implications in Mercosur and the recent agreement of the South American bloc with Singapore.
This interview has been translated from the original Spanish and edited for length.
What are the expectations generated by the FTA signed by Mercosur with Singapore, and how do you think it can operate in terms of the relationship with ASEAN?
Singapore is a big port city. Looking at tariffs, there was not a very big barrier to enter Singapore. Beyond what has been advanced in services, we still do not know the agreement.
One area of analysis is the real impact that the agreement may have, and another one is the symbolic impact it has, to open the door to Southeast Asia. I would say that the most relevant is the latter.
You are entering through Singapore to ASEAN, which is a super attractive market with more than 640 million inhabitants, growing before the pandemic at 5 percent per year, with relevant countries like Indonesia, the Philippines, Vietnam, etc. I always say a fact that is not very well known: Myanmar has the population of Argentina. You would think that they are not central markets but they have an enormous potential.
The trade flows that may increase I would say will be more in services than in goods, because Singapore’s tariffs are already almost non-existent. It is a port-city that handles logistics and value addition for some products there.
What impact can the FTA have on the bloc’s foreign relations?
For Mercosur it is a breath of fresh air, because it has closed one of the negotiations it had underway (Canada, South Korea, Lebanon, and Singapore). It is a foreign policy success for Mercosur. It has been years since Mercosur achieved something similar; it managed to close a deal with the European Union in 2019 but the ratification processes never got started due to environmental issues.
Now the agreement with Singapore is sealed, which has the particular benefit that it will quickly enter into force on their side, because the parliamentary issue is not complex. We have to see what happens on [the Mercosur] side.
It is a positive sign for Mercosur to finally have an agenda with the Asia-Pacific. You cannot say that you have an agenda with the Asia-Pacific with the very limited agreement with India that Mercosur has, which is practically insignificant. You have no agenda with South Korea; the agreement is at a standstill and there are no signs that it is going to change. You have no agenda with Japan and even less with China. With China there is only Uruguay’s agenda, but Mercosur has no agenda with China directly.
Regarding Singapore as an international financial center, do you think this agreement can improve Mercosur’s position?
Indirectly what happens is that when you talk about Singapore, you talk about China as well. A large part of Singapore’s business is Chinese. There is a logic and a way of doing business linked to the Chinese. The fact that you have an FTA with Singapore may eventually generate some incentive for some Chinese or new generation Singaporean businessmen to want to invest in the region. It is always possible with the logic of Singapore as a gateway to ASEAN..
Even Singapore’s foreign trade figures are magnified because a large part of it goes to the rest of the ASEAN countries through Singapore and is often classified as imports or exports from Singapore, when in fact it is not.
This does not mean that Singapore does not have industry, mainly in assembly and technology, but it has businesses that have more to do with the region. It is a logistics hub with high added value. From the point of view of its impact on Mercosur in the trade of goods, I do not see it as significant, but what’s important is the symbolic fact of having finalized a deal with an economy so open to the world, with so many first-generation agreements to its name.
Singapore is always leading these processes of first-generation agreements: with the P4 (Chile, Singapore, New Zealand, and Brunei) which later ended up in the TPP (P4 + Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, and the United States) and today in the CPTPP.
I think this is good news for Mercosur from every point of view.
Taking into account that Paraguay does not have diplomatic relations with China, can Singapore be a gateway to the Chinese capital?
I am not going to tell you that this was the reason why the agreement was closed, but Paraguay promoted it a lot during its pro tempore presidency and that has to do with the fact that it is a way of approaching Chinese business without changing its sign. Some conversations I have had with people from Paraguay who are advising presidential candidates in the next elections show that none of them is thinking of changing their sign. It is a discussion they are not having; they are not imagining that they are going to have relations with China. So it is an indirect way to attract Chinese investment through Singapore.
Paraguay can do business logistically through Uruguay or Argentina. The Chinese are very pragmatic about that. Paraguay has no problem with that, China has no problem with that. The Vienna Convention on the Law of Treaties also allows for that, by the way.
Paraguay itself realizes that they cannot go against reality.
You mentioned Mercosur’s agreements with India and South Korea, do you foresee any progress in the relationship with those countries?
I do not see any progress with India. The agreement signed is ridiculous. There are 300 liberalized products, some of which were already liberalized previously. There is not even a trade liberalization schedule, they are fixed preferences. The agreement is bad.
Efforts to deepen agreements with India have been bad in the region as well. Chile did badly. Chile expanded its agreement a little bit, by about 2,000 products per part, but they didn’t even manage to put in wine.
There was some idea of Peru making progress with India. What we have to wait is for India to open up. The bet is that India will open up with someone and then start a process of opening where Mercosur can take advantage. We must look with great expectation at India’s negotiation with Peru, which I think has come to a standstill, and see what happens with the big negotiation with the European Union, which is now accelerating.
You realize the pragmatism of international relations. In the middle of the war in Ukraine, India did not condemn Russia and yet the European Union has already finished its first round of negotiations with India.
It may be that if the agreement between the European Union and India is concluded, this will be a signal for Mercosur to deepen the link. It is not easy to negotiate with India; it is still a very closed economy and it is very complicated.
As for South Korea, I believe that the Argentine veto is still in place, but also the Brazilian veto is still in place. I do not see Canada’s interest in reactivating the negotiations and Lebanon is an agreement without great economic impact. From what I understand, Argentina has also asked to postpone the negotiations with Indonesia and Vietnam until next year. I do not know what may happen during Uruguay’s pro tempore presidency, but in terms of external relations I would say little or nothing.
What benefits can Uruguay have from an FTA with China outside Mercosur?
Taking into account the productive structures that China and Uruguay have, the results of the classic models are the same: You should do well with the United States, you should do well with Europe, you should do well with China, with Korea, and with Japan.
The nuances of how well you do increase depending on how much industry you have. In the case of Brazil and in the case of Argentina, they are more impacted than in the case of Uruguay, which has less industry and less interregional connection than Argentina with Brazil.
I believe that an FTA with the United States and the European Union would hit Argentine and Brazilian industry. An FTA with China would hit even more, the same with Korea and Japan. Argentina and Brazil have what Uruguay does not, because Uruguay experienced a productive and industrial adjustment with the opening of Mercosur — that is to say, industry in Uruguay was killed by Argentina and Brazil a few years ago. Those who survived that phenomenon will not have another coup de grace.
Uruguay has a clear benefit of complementary trade. It will increase agribusiness exports and will acquire medium and light industry products, but mainly from the technological industry that it does not produce and that it buys from the rest of the world, thus diversifying.
From the point of view of trade in goods, there is a gain in complementary trade. This has been clearly studied. It implies lower tariffs for exports, equalizing preferences to those of competitors such as Australia, New Zealand, etc. and also lowering import tariffs. Uruguay pays a lot of tariffs for importing products from China, from televisions, air conditioners, motorcycles. This will make the products come to Uruguay at a lower price. This is a first positive phenomenon.
Regarding the reprimarization — the return to a reliance on commodity exports — that trade with China implies for many economies, could it have a negative impact on Uruguay?
I do not agree and I do not see where it is said that an FTA with China will further concentrate Uruguay’s exports. Another discussion is whether we reprimarize or not reprimarize. I believe that this is not a problem that relates to China; it is a problem of our productive structures. You cannot blame China for something that you did not do at the time.
We are not going to produce computers now. We are going to produce processed food with services, and we are going to produce services.
China also buys dairy products and other things. It does not only buy primary products. If you look at the amount of items that Chile exported to China before the FTA and after the FTA, the clearest conclusion is that more companies export more goods and services to China after the FTA. There is more business, not less. There is more business because you become more attractive to investments from both nationals and foreigners who want to take advantage of this benefit.
The tariff level of processed foods in China is enormous, but not only that, for example blueberries, fruit, everything is escalating in tariffs that reach 25-30 percent, so if you lower that you generate incentives to increase the installed capacity of food exports. Maybe an Argentinean who produces food in Argentina settles in Uruguay to produce a line of products for export. I believe that this type of phenomena leads to more and more diversified trade.
At the same time, the effect of Uruguay closing an FTA with China as a gateway to Asia-Pacific is not minor. There is a tremendous potential there that is difficult to quantify; these are dynamic effects of international trade, not static. It is not possible to calculate what is going to happen with this through a specific methodology, but I have no doubt that it is very relevant. China will automatically upgrade to a comprehensive strategic partnership with Uruguay.
Within this framework, some mandates are given to the Chinese Communist Party to invest in one sector or another. China leads the production of electric cars worldwide, 80 percent of the solar panels that Uruguay buys are Chinese, Uruguay needs money for green hydrogen also led by China, so it is reasonable to think that in this new world that we want to go through, where renewable energy is something relevant and China is the leader, you can have investments that mark the needle. Obviously, an investment of $3 billion moves the needle for Uruguay, because of its GDP.
There are many benefits for Uruguay of closing a deal with China. Of course, for China they are more political, geopolitical, and geostrategic, but for Uruguay there are concrete benefits in trade, services, and cooperation. China is a great cooperating partner in Latin America, we are not still waiting for European or American cooperation. We take Chinese cooperation, there is a lot of money there that makes the difference.
I think the benefits are very varied and it does not mean that [a China-Uruguay deal] is the only thing. I have always imagined China will take other steps, or that China’s step will generate something in Mercosur that will make other steps be taken.
Why do you think this is a concrete possibility in this global scenario?
The China of Xi Jinping today is not the China of a few years ago, when former President Vázquez wanted to move forward with a trade agreement. Xi, who is no fool, looks at the map. On the map he has a United States whose sole objective is to isolate China. The geopolitical tension in the United States, which comes from Obama onwards, was boosted by Trump and Biden with his particular style is taking it to the extreme.
There is a geopolitical war between China and the United States, so it suits China very well to partner with Uruguay in an FTA. Uruguay is the best student of the class at the moment. It is the country that has the best environmental, democratic, institutional and stability indicators. That country tells China that it wants an FTA, it is a goal in the corner for the United States and Europe.
It is natural to think that China would dare to take this step because of the pressure it feels in this international context. And if they dare to take this step it is because they see a lost Argentina and a Brazil that has given ambiguous signals, which is very difficult to explain to the Chinese. They are beginning to understand that Mercosur is a rather strange thing.
Asking a Chinese to understand Argentina, Brazil, and Uruguay is impossible. They will never understand us. So let them not worry. Let them move forward with the FTA and Uruguay will take care of Mercosur. Argentina and Brazil will not get angry with China, because nobody can get angry with China.
This article was first published in Spanish in ReporteAsia: